Market movers today
Today, we get Danish foreign exchange reserve figures for April, which may well attract some attention, as the Danish krone has been trading relatively weak in April and not far from where Danmarks Nationalbank intervened in December.
In the UK, we monitor the Bank of England meeting, but we do not think the BoE will change its policy. Besides the Bank of England meeting, we also have local elections in the UK today. While this is normally not something we follow closely, it is interesting in the light of the Brexit extension and the upcoming European elections. Most polls suggest the Conservatives may suffer a heavy defeat, losing many seats, which would likely put further pressure on May to resign as party leader. We should know more about the results tomorrow morning.
In Scandi, we get Swedish and Norwegian PMI manufacturing (see page 2).
Selected market news
Most of Europe was off yesterday due to Labour Day and therefore markets centred on key events taking place in the US.
As expected, the Fed left the target range unchanged at 2.25-2.50% and overall there were no major changes to the policy signals (Powell said the IOER rate cut was a technical adjustment and not an expression of an easing bias, see more below). On one hand, the Fed said economic growth and the labour market remain strong but on the other, hand inflation is running below the 2% target
The Fed caught the market by surprise by cutting the Interest on Excess Reserves (IOER) by 5bp to 2.35% from 2.45% but Powell stressed during the press conference that this should not be interpreted as the beginning of an easing cycle. The Effective Fed Funds rate (EFFR) has risen to 2.45% since Easter due to a decline in the supply of bank reserves and was thus only 5bp below the top end of the Fed's target range. The quickest way for the Fed to return the EFFR closer to the mid-point is to cut the IOER. There had been speculation in the market that the Fed could make this move at the June meeting, but the market was not priced for a cut to come at the May meeting - the May Fed Funds futures have traded around 2.42%.
ISM manufacturing dropped sharply to 52.8 from 55.3 in April. All the important subcomponents fell as well (employment, new orders, etc.). The ISM has been quite high for some time and, as we have highlighted, the US manufacturing sector is not immune to what happens overseas. So it is natural that the ISM had to go down eventually, although the decline is bigger than we had anticipated. That said, remember the service sector is more important for the overall economy.
Scandi markets
Norway. Today brings the manufacturing PMI for April. Historically, the PMI has tended to surprise to the upside the month before Easter, and disappoint slightly in the month of Easter. Hence, we expect the PMI to fall slightly to 56.0, but this still points to further strong growth in Norwegian manufacturing despite the global slowdown and bears witness to persisting differences in relative industrial production.
Fixed income markets
Initially, markets interpreted the IOER rate cut and the Fed’s statement as a dovish twist but US yields ended higher and the curve 2s10s flattened again after Powell’s comment that the Fed is firmly on hold and that current inflation weakness is ‘transient’.
France will auction EUR7.0 – 8.5bn in the 10Y, 15Y and 20Y bonds at today’s monthly long-end auctions. The French Tresor has opted for a slightly lower amount and ‘shorter’ maturities this time. It could reflect concerns that some investors might be off an extra day after Labour Day and that Japanese investors might be absent due to Golden Week. The recent April-steepening of the 10s30s curve in France during April might also have moved issuance towards lower maturities. We remain negative on France relative to Spain, Ireland, Belgium and Portugal as we are now past the big April redemptions and as bond supply might be revised higher as Macron adds to fiscal spending.
FX markets
EUR/USD initially rose above 1.1260 on the statement from the FOMC meeting and the news that the Fed had cut the IOER by 5bp. Helping EUR/USD higher was an initial drop in the 2Y USD OIS swap rate of 5bp. However, once Fed Chair Powell got going on the press conference, the initial move more than reversed, sending EUR/USD back down to 1.1200. The market took its cue from Powell’s comments that the Fed expects the inflation shortfall to be transitory and that the next move on rates could be either up or down. We maintain our view that EUR/USD is headed back towards 1.13 in 3M (NYSE:MMM) – a move that would have less to do with Fed policy and more to do with further improvement in the Chinese economy including a US-China trade deal.
In the Scandies, markets will return from holidays in Sweden and Norway - holidays that meant poor liquidity amplified moves in both the SEK and NOK triggered by external news flow. Global market sentiment will continue to set the tone for the SEK and NOK today – as domestic manufacturing PMIs are unlikely to shake up the two currencies amid markets digesting the FOMC message, uncertainty regarding Iran waivers, Venezuela oil supply concerns and recent disappointing global data. We still think it makes sense to be positioned for higher USD/NOK 3M implied volatility.